Pethokoukis, Economics, U.S. Economy

The Washington Post (and Obama) says ‘America needs to get used to slower growth.’ No, it does not!

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This defeatist headline in the Washington Post, “Why America needs to get used to slower growth,” really bugs the Snickers out of me. The story itself, by ace reporter Neil Irwin, concerns a JPMorgan research report that I’ve been writing about.

Basically, the bank’s econ team argues weaker labor supply and productivity growth means US GDP growth will be markedly slower in the future than it’s been in the past. Since 1929, for instance, the US economy has grown by 3.3% a year, adjusted for inflation. But the economy has performed a lot worse during the past decade, growing just 1.8% a year. And JPMorgan thinks that’s what we should more or less expect going forward:

The long-run growth potential of the US economy continues to slide lower, by our estimate, to around 1.75%; if realized this would be the lowest of the post-WWII era.

The report and the WaPo piece on it reminds me of this bit from the recent Obama budget:

In the 21st Century, real GDP growth in the United States is likely to be permanently slower than it was in earlier eras because of a slowdown in labor force growth initially due to the retirement of the post-World War II baby boom generation, and later due to a decline in the growth of the working age population.

But, to quote Ebenezer Scrooge as he spoke to the Ghost of Christmas Yet to Come, “… answer me one question. Are these the shadows of the things that will be, or are they shadows of things that may be, only?”

Indeed, if the courses be departed from, the ends will change! America’s gloomy economic destiny is not carved in stone. US economic policy is far from optimal, after all.

For instance, immigration and  Social Security reform could boost growth in labor supply. And a recent McKinsey report identifies way to boost productivity and GDP growth including “the continued expansion of shale gas and oil production; increased US trade competitiveness in knowledge-intensive goods; the potential of big data analytics to raise productivity within sectors; increased investment in infrastructure, with a new emphasis on its productivity; and new approaches to both K–12 and post-secondary education.”

Can America grow as fast in the future as it has in the past? McKinsey seems think so. And AEI’s Stephen Oliner, a former Fed economist, writes in a recent paper that chip innovation is continuing at a rapid pace, “raising the possibility of a second wave in the IT revolution [and] that the pace of labor productivity growth could rise to its long-run average of 2¼ percent or even above.”

The early part of the 1980s and 1990s both saw rising concern that the age of fast US economic growth was over — right before the economy accelerated. And here we are again. But these new fears will become reality only if we stand by and do nothing.

4 thoughts on “The Washington Post (and Obama) says ‘America needs to get used to slower growth.’ No, it does not!

  1. The problem is all of this productivity can REDUCE the need for labor, and create even more wage disparity. It won’t help. And we’re not here just to put up better numbers. it’s going to be about the kind of lives people will have.

  2. Jim
    I can understand even the President being pessimistic in the middle of a Great Recession. What is fantastic is seeing Paul Krugman in the July/August 1997 issue of the Harvard Business Review, being pessimistic smack in the middle of the Great Moderation!
    “Most economists believe that the US economy is currently very close to, if not actually above, its maximum sustainable level of employment and capacity utilization. If they are right, from this point onwards growth will have to come from increases either in productivity (that is, in the volume of output per worker) or in the size of the potential work force; and official statistics show both productivity and the workforce growing sluggishly. So standard economic analysis suggests that we cannot look forward to growth at a rate of much more than 2 percent over the next few years. And if we – or more precisely the Federal Reserve – try to force faster growth by keeping interest rates low, the main result will merely be a return to the bad old days of serious inflation.”

  3. I have to say, Pethokoukis is perhaps the best economics blogger going today.

    Bring on boom times again, and you will see the news articles about the bright future ahead. Productivity will rise as overhead costs per unit shrink, and businesses have the money and incentive to buy better equipment etc.

    The weak link today is the Fed. It is too timid in monetary expansionism. Obama’s anti-business stances are not helpful either.

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